Next year will mark the 10th anniversary of the 1997 Asian financial crisis, but that event already seems a million miles away in terms of how things have changed since then. No longer vulnerable to speculative attacks on their currencies, leading Asian nations have built up massive foreign exchange reserves, strengthened their banking and financial systems and become far less dependent upon foreign borrowing than they were when crisis last struck.
Against this background, talk of an Asian Monetary Fund of the kind proposed in 1997 by Japan’s then vice finance minister for international affairs Eisuke Sakakibara has faded into the background. But as Sakakibara’s successor, Haruhiko Kuroda (who has since gone on to become president of the Asian Development Bank) has noted, the idea of such a fund is “not dead”. It lives on under a different name.
This is the Chiang Mai Initiative or CMI, launched in May 2000 by Asean+3 finance ministers during the ADB annual meeting, held that year in the Thai resort from which the CMI took its name. The CMI will again be on the agenda this year in Hyderabad as Asean+3 ministers meet to discuss expanding the CMI into a “centralized, multilaterally administered arrangement with substantially larger resources than are presently available”.
Arrangement
The CMI is a network of 16 bilateral currency swap arrangements among eight countries, totalling $71.5 billion in value, which, once it becomes “multilateralized”, will in effect be a monetary fund. The fact that it is still being referred to as an “arrangement” reflects the anxiety of the CMI partners to avoid sparking friction of the kind seen in 1997, when both the US administration and the IMF opposed the idea of a regional monetary fund.
The IMF has since dropped its opposition, and the US pays less attention to such issues nowadays, with security issues dominating foreign policy far more than 10 years ago when global economic issues were high on the White House agenda. Even so, Asia is moving cautiously because of the need to build up supporting “infrastructure” for a regional monetary fund before jumping in feet first as Japan and others tried to do in 1997.
There is still a need for a “regional reserve pooling arrangement”, according to an ADB strategy paper.“The Asian financial crisis highlighted the importance of establishing an effective financing facility so that economies in the region can prevent currency crises or respond effectively to crises once they occur in a world of increased financial globalization,” the paper says.
Supervision
A regional monetary fund cannot function without proper surveillance of its member economies, of the kind conducted by the IMF. So the Asean+3 group (10 Asean states plus Japan, China and South Korea) is establishing such surveillance by means of information sharing and policy dialogue on financial, monetary and fiscal issues. The Asean+3 group is also seeking to develop an early warning system by monitoring members’ economies and banking and financial systems, with an aim to averting future crises.
Once these structures are in place, the multilateralized CMI will be in a position to declare itself a fully-fledged monetary fund, albeit one that will seek to “complement rather than compete with” the IMF, an official told Emerging Markets. At present any country wanting to invoke a CMI swap (although none has needed to do so yet) needs an IMF programme to draw down more than 20% of its swap credit line. The permitted draw-down without an IMF programme is being progressively raised, however.
The CMI may have another role to play in future. The ADB is planning to establish an Asian Currency Unit – an index of how currencies of Asean+3 members (and possibly others) move against one another. If this group decides to set up an Asian monetary system and an exchange rate mechanism of the kind that preceded European Monetary Union, the CMI could be used to finance exchange rate interventions. Kuroda makes no secret of the fact that be believes Asia must one day have a single currency like the euro.